The Producer Price Index (PPI) for final demand shot up in May to 6.5% year-over-year. While a large portion of these rapid increases continue to be driven by higher oil prices, impacts of broadening price pressures are being felt well beyond the energy sector.
This hot PPI report came on the heels of an equally hot Consumer Price Index (CPI) release earlier this week where CPI jumped up to 4.2% year-over-year. These reports are especially troublesome when viewed together as rising PPI typically leads increases in CPI. This is because higher costs throughout the supply chain are historically passed down to the consumer. This was especially true in 2021 and 2022 (see red ellipse on graph below).
It’s no secret that consumer spending has been propelling the economy over the last few years, but a second round of high inflation could knock out some previously resilient consumers and have serious implications for the broader economy. At the same time, high inflation forces the Fed to reevaluate their timeline for rate cuts (and even puts rate hikes on the table) – keeping borrowing costs elevated.